Dollar, yuan stronger as risk sentiment improves

NEW YORK (Reuters) - The dollar index edged higher on Thursday and China’s currency strengthened after the Chinese central bank fixed the yuan at a stronger level than expected, boosting risk appetite.

FILE PHOTO: U.S. dollar and Chinese yuan notes are seen in this picture illustration June 2, 2017. REUTERS/Thomas White/File Photo

The People’s Bank of China set the midpoint rate at 7.0039. The fixing was still the weakest in more than a decade, however.

“Last night fixed over 7 and markets seem to be taking that fairly well, so perhaps some calm is installed in the market at least for the very near term,” said Mazen Issa, senior FX strategist at TD Securities in New York.

Data showing a surprise increase in Chinese exports in July from a year earlier added to the improving sentiment.

The dollar fell 0.13% against the offshore yuan to 7.0727. The dollar index against a basket of major currencies gained 0.08% to 97.626.

On Monday, China allowed its currency to weaken past 7 per dollar for the first time since 2008, sparking broad risk aversion on concerns that the U.S.-China trade war was escalating.

The move came in response to U.S. President Donald Trump’s announcement last week that he would impose more tariffs on Chinese goods. Washington labelled Beijing a currency manipulator on Monday.

The dollar briefly dipped on Thursday after Trump said the Federal Reserve’s interest rate policy is keeping the dollar high and harming U.S. manufacturers.

Trade tensions are likely to continue to weigh on the Chinese currency and risk appetite, with no resolution to the U.S.-China dispute in sight.

Increasingly dovish central bank policies are also adding to nerves that the global economic outlook may be worse than feared.

The Philippines became the latest country to cut interest rates on Thursday, following cuts by New Zealand, India and Thailand on Wednesday.

“The risk of these central banks trying to out-dove one another is, the more they do, the more they instil panic into market participants that this is worse than expected,” Issa said.

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The single currency has been boosted in recent days by the unwind of emerging market carry trades that were funded in euros.

The euro dropped in afternoon trading after Italian Deputy Prime Minister Matteo Salvini said there was no way to patch up differences in Italy’s ruling coalition and the only way forward was to hold new elections.